How to set your budget for a big home improvement project

No matter what we’re shopping for, few of us like sticking to a budget. But when you’re doing a major home remodeling project, knowing precisely how much money you have to spend and staying within that budget is crucial.

“As contractors, we design our projects to our clients’ budgets,” says J.P. Ward, architect and vice president of business development at Anthony Wilder Design/Build in Cabin John, Md. “Homeowners need to know what their budget is upfront and be realistic about what they can afford.”

Considering a big home renovation? Here’s how to set your priorities, establish a spending limit and stick to your budget.

Determine your goals

The first question you have to ask yourself is why you want to renovate, says Ridley Wills, owner and design director at Wills Co., a design-build firm in Nashville. Are you remodeling your kitchen because you want more counter space? Do you want to create an open floor plan? Are you tired of not having enough space to entertain guests? “Figure out what your goals are and then figure out your budget,” Wills says.

Drill down to specifics

Before you start crunching the numbers, decide on what details you want, says Tom Miller, a Portland, Ore., home remodeler and president of the National Association of the Remodeling Industry. “The biggest consideration is pinning down decisions and selecting materials and finishings before the job begins,” he says. “That gets you to a reliable budget.” For example, do you want hardwood floors or carpet? Black or stainless-steel appliances? Providing a contractor with a list of exactly what you want can help you formulate an accurate budget.

Assess your financing options

Unless you’re going to pay for all remodeling expenses with cash, you’ll need to borrow money for the project. One option is to obtain a home-equity line of credit (HELOC), which allows you to borrow money on an as-needed basis, up to a certain limit, using the equity in your home as collateral. You’ll receive an introductory rate for the line of credit that can change after a set period of time.

Alternatively, you can apply for a home-equity loan, where you receive a lump sum upfront, typically at a fixed interest rate, and pay back the loan in monthly installments.

Because the prime rate — the most prevalent interest rate index used to price a HELOC — is rising, the HELOC is not the “slam dunk” it used to be, says Richard Redmond, mortgage broker at All California Mortgage in Larkspur and author of “Mortgages: The Insider’s Guide.” Your best approach is to meet with a mortgage lender to explore your options.

Consider resale value

If you’re planning to stay in your home long-term, “it may make sense to splurge to create your dream space,” Ward says. However, if you’re thinking about selling the home within a few years, focus on your potential return on investment.

Your return on investment is largely based on what your house is worth. (You wouldn’t want to install a $50,000 kitchen in a $200,000 home.) That being said, some improvement projects can add more value to your home than others. You can compare the average cost of 21 popular remodeling projects with the value those projects retain at resale in 100 U.S. markets using Remodeling magazine’s annual Cost vs. Value report.

Get a ‘hard’ quote

Although most home contractors will give you a free estimate for your renovation, you generally have to pay money for a “hard” quote, where you’ll receive a detailed outline of the project’s costs and the timeline for the job. Most contractors are too busy to give free quotes, Miller says. “Quotes also take hours of time to formulate,” he added.

You can sign a time-and-materials contract, where your payment is based on the time spent by the contractor’s employees and any subcontractors’ employees to perform the work, and for the materials used in the construction. If you’re looking to stick to a budget, though, you’re better off signing a fixed-price contract, where you pay the contractor a set lump sum for the project upfront.

Set aside money for surprises

Wills recommends setting aside an additional 10 percent to 15 percent in cash to accommodate hidden expenses. “You don’t know what you’re going to find before you start tearing down walls,” he says. “Electrical work may not have been done to code. There could be asbestos or mold hiding behind plaster. You just don’t know.”

The best-case scenario: “If you don’t spend the extra money, you can put it toward furnishings.”

Be smart about cutting costs

You certainly don’t want to cheap out on important products or materials, but there are ways to trim your budget without sacrificing the quality of the workmanship.

Here are five strategic ways to save money:

•Opt for lower-cost finishings. Choosing different finishings, such as vinyl flooring over tile, can help you save. For instance, slab granite costs $40 to $75 per square foot, compared with only $10 to $40 per square foot for laminate countertops, according to home remodeling resource Fixr.com.

•Refurbish older items. Instead of replacing high-cost items, such as home appliances, you can curb expenses by salvaging what you have (assuming it’s in good working condition). Case in point: Refinishing or refacing existing cabinets can save you up to 30 percent compared with buying new cabinetry, according to Angie’s List

•Tackle small tasks yourself. You can reduce labor costs if you’re willing to do some of the work yourself, such as light initial deconstruction (pulling up carpeting, removing bathroom tile) or painting a room after the contractor completes construction.

•Time it right. Home contractors tend to be busiest during the spring and summer, so you may be able to save by commissioning the work during fall or winter. For example, you might nab a deal by building a new deck during winter, when deck designers are less busy. The caveat: Some times are better than others for certain projects.

●•Resist adding things along the way. As the renovation moves along, you may be tempted to tack on another small item here and there, but change orders can be expensive, as “asking for extra things during construction often adds to the duration of the job and the labor,” Ward says. In other words, don’t deviate from your budget mid-project.